Are Deep-Discounters for Real?

“A full service broker told me that the discount brokers make more on the spread than full service brokers. Therefore, the $18 to $40 price quoted is not the real price. Could you please comment.” — Barbara

Ah, just the sort of unbiased, straight-shooting selfless advice some full-service brokers are famous for.

I don’t want to appear to be shilling for Ceres, because I’m not. My own accounts are in three places: at a deep-discount brokerage owned by the same parent as Ceres, at one of the large discounters of the considerably more expensive Schwab or Fidelity variety, and at a well-known, full-service broker who gives me a big discount but still costs far more than a deep discounter. I’ve had a personal relationship there for 25 years, long before there were discounters of any kind. If I were starting from scratch, I might well have an account at Ceres or one of the other really-deep discount brokers and might well not have an account at a full-service broker.

But while it may — or may not — be true that some firms will occasionally do better in terms of “price improvement” than a deep discounter would, I’ve never seen anything that convinces me this is true. I could be wrong, but I believe the price advantages of deep discounters are dramatic.

And in a related issue, thanks to the S.E.C. in these last few Clinton years, some really important changes have been made to help split some of the hairs that were costing us investors a lot of dough. “Spreads” are being shrunk, and the basic “eighth” that used to dominate all trading is giving way to finer measurements that narrow transaction costs as well.

The transaction costs of trading — especially in a tax-sheltered account where taxes are not an issue — have plummeted since I opened my first full-service account, and even in the last several years since I opened my first deep-discount account. America’s transaction machine has become more efficient. We are getting a better deal.

Then again, if you believe as I do in buying and selling relatively infrequently, there comes a point where the difference in price makes very little difference. To someone who trades in and out all day, the difference between $15 or $50 (let alone $300) is huge. To someone who buys $25,000 of a stock and holds it three years, who cares?